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Netflix: Great idea, but will the

Business Model Work?
By:
Hemant Vasishth (232008)
Juli Gupta (232009)

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About Netflix

Founded by: Reed Hastings

Started in: 1997

Netflix is a global provider of films and television

series. Netflix started as an American DVD-bymail service in 1998, and began streaming in
2007.

Major competitor: Blockbuster

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How did it start?

The idea of Netflix came to Hastings when he was

forced to pay $40 in overdue fines after returning
Apollo 14 well past its due date.

+A brief history
April 14,
1998

Septembe
r 1999

Early 2000

2000

May 29,
2002

The Netflix website was launched with only 30 employees

925 works available for rent through a traditional pay-per-rental
model
Introduced the monthly subscription concept

Dropped the single-rental model

Netflix was offered for acquisition to Blockbuster for $50 million;

however, Blockbuster declined the offer.
Netflix initiated an IPO on May 29, 2002, selling 5.5 million shares
of common stock at the price of US$15.00 per share.

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Business Model

Monthly subscription fee of USD 17.99

User is entitled to have three DVDs as long as they are

paying the monthly fee.

On Netflix website, you

list the DVDs you
would like to watch,
choosing from Netflixs
menu of over 12,000
movies.

DVDs are shipped to

your house via USPS.
You can keep the DVDs
as long as you want
with no late fee.

When you return one,

the next selection on
your movie priority list
is mailed out.

Does Netflix have a good story?

Are its strengths sufficiently
compelling to offset its weaknesses?
If a debate were held between the
proponents and critics of Netflixs
business model, who would win?
Why?

+ Value proposition of Netflix vs

Blockbuster
Customer convenience
The sheer number of stores that Blockbuster had to maintain in order to
provide convenience added to the infrastructure costs associated with
the business, something that Netflix did not have to contend with. This
allowed Netflix to gain a huge operational and cost advantage over its
brick and mortar rival.

Lack of suitable movie alternatives

Blockbuster shelves primarily catered to new releases. Netflix on the
other hand, leveraged technology to introduce the concept of queuing
movies and later providing movie recommendations based on customer
preferences. This allowed Netflix to differentiate itself from Blockbuster
and its competitors as users loved getting movie recommendations
from Netflix.
Another consequence of this innovation was that it allowed Netflix to
wield more power when dealing with its suppliers such as movie
studios. Independent movie studios for example were keen to
release their movies through Netflix since they did not have to spend
exorbitant amounts of money to capture the attention of the public.

Value proposition of Netflix vs

Blockbuster (contd.)
Not Dependence on revenue
earned in late fees
Late fees that Blockbuster and other stores charged were
exorbitant (often higher than the cost of the original rental
itself) and arbitrarily enforced (kicking in within minutes of
the deadline with no room for leniency). Although Netflix
started out with the pricing model followed by the industry, it
quickly evolved and debuted the unlimited prepaid rental
plan whereby a user did not have to pay any late fees for
rentals. This pricing model was marketed very aggressively
by Netflix, and quickly won over customers due this model.

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Strengths & Weaknesses
Strengths

Weaknesses

Convenience

Can Netflix remain most

convenient

DVDs rather than

videotapes

Netflixs rivals have DVDs

too

Bigger selection than video

stores

User fatigue

No late fees

Fulfillment challenges

Strong partnership network

Are the partnerships

unique?

Cool website

Who does the work?

Personalization

Do customers care?

Who would win the debate between

proponents and critics of Netflix?
In my opinion the proponents would win as the value
proposition of Netflix is unique in some aspects and if
they adapt with new technologies to provide movie on
Demand like cable operators, they will be able to
maintain their market share. Regarding the customer
fatigue and subscription drop outs after a couple of
months, I think that the robust personalized
recommendation system and ever increasing new
movies should keep the users hooked on to their
subscriptions

What is Netflixs core competency?

What are its strategic assets?
Is there anything in Netflixs business
model that makes what the company is
doing hard to replicate? Explain your
answer.

Core competency and Strategic

assets
Netflixs core competency is

Content delivery to the home in a

convenient way
Strategic assets:
Partnerships with the studios
Recommendation software
State-of-the-art distribution network 41 shipping centers in
the U.S. that can reach most customers with one-day delivery
Original programming content

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VRIN Framework for Netflix DVD
model
Valuable

Rare

Inimitable

Nonsubstitutable

Recommendati
on system

Digital Library

Original
Programming
Content

Existing
infrastructure
(website,
distribution on
multiple digital
channels)

Subscription
model

Describe Netflixs partnership network.

Describe how each of Netflixs major
partnerships supports its business
model.

In December, revenue sharing agreements were reached with

Warner Home Video and Columbia Tri-Star. In exchange for a
percentage of rental receipts, the movie studios gave NetFlix
better prices on large quantities of DVDs, which the firm needed
to have on hand to fulfill requests for new releases. A number of
other studios, including Dreamworks and Artisan, were soon
signed up as well.
In January 2001, NetFlix signed a deal that gave it exclusive
distribution of the DVD version of a recent arthouse hit,
Croupier,which it would have for three months before the title
was available elsewhere

During the spring, the company began offering a free six-week

trial membership via the popular movie information Web site the
Internet Movie Database and began selling off overstocked titles
through retailer Wherehouse and e-tailer Half.com.
In September, NetFlix partnered with electronics and DVD
retailer Best Buyto create a co-branded DVD rental service in
the company's 1,800 stores and on its Web sites. Best Buyalso
owned several other retail chains, including Sam Goody, Media
Play, and Suncoast.

Describe how Netflix interfaces with its

customers.
To what extent to you believe that this
component of Netflixs business model
contributes to its sustainable
competitive advantage.

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Customer Interfacing
The customer interface is the environment in which
the. service is delivered. It involves contact with the
customer, encompassing interactions that are personto-person, via mail, telephone, fax, computer, or some.
Simple to user interface on website
Valuable personalized recommendations
Direct mailing to customers at the comfort of their
home
Unlimited rentals with no late fees is much
appreciated by users

If you were advising Netflix, what would

you tell it to do to make its business
model more financially viable for the
long term?

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Keep abreast with technology

In the long run, the customers would not like to wait for
their movie DVD to arrive in a postal mail. It is suspected
that the customers will not have the patience required to
order and receive the movie DVDs over postal mail. As
the subscriber base increases, the turnaround times
might get even longer thus leading to potential loss of
customer base.

Netflix would need to do something to promote impulse

buying by customers. Netflix can start a standalone
online video streaming service.

It needs to keep pace with the times and should update

itself with the rapid pace of technological advancements
in the market.

They have to move beyond offering rental movies to the

customers. They can provide free online video streaming

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Expand their geography

They can increase their international presence. This

would help them in changing their business model for
getting close to the end consumers. They can change
their business model to per year charges. The per year
charges would then be a small amount if the customer
base is big enough of an international scale.

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Create Netflix a social
community

Make Netflix a social network and not just a video on demand

service. This would help retain customers for a lifetime. The
customers would like to like and comment on their favorite
videos and TV shows on their website. They should be able to
blog their views on the site so that they create a kind of
network with the other viewers worldwide.

There can be notifications and subscriptions so that the

customers are notified by SMS or email whenever there is
launch of their favorite TV serials season etc.

Helping users flag their favorite videos on the website. They

can have a feature of following their favorite artist so that they
are up to date with the current status of their favorite artists.

Website can have features like ,most viewed videos, or most

popular videos so that customers can do justice to their

+ THANK

YOU!